This act applies to bonds, debentures, notes, and similar debt securities offered for public sale and issued under trust indentures with more than $7.5 million of securities outstanding at any one time. Even though such securities may be registered under the Securities Act, they may not be offered for sale to the public unless the trust indenture conforms to statutory standards of this act. Designed to safeguard the rights and interests of the purchasers, the act also:
- prohibits the indenture trustee from conflicting interests which might interfere with exercising its duties on behalf of the securities purchasers;
- requires the trustee to be a corporation with minimum combined capital and surplus;
- imposes high standards of conduct and responsibility on the trustee;
- precludes, in the event of default, preferential collection of certain claims owing to the trustee by the issuer;
- provides that the issuer supply to the trustee evidence of compliance with indenture terms and conditions (such as those relating to the release or substitution of mortgaged property, issue of new securities, or satisfaction of the indenture); and
- requires the trustee to provide reports and notices to security holders.
Other provisions of the act prohibit impairing the securityholders’ right to sue individually for principal and interest, except under certain circumstances. It also requires maintaining a list of securityholders for their use in communicating with each other regarding their rights as securityholders.
Applications for qualification of trust indentures are examined by the SEC’s Division of Corporation Finance for compliance with the law and the Commission’s rules.
In 1987, the Commission sent a legislative proposal to Congress which would modernize procedures under the act to meet the public’s needs in view of novel debt instruments and modern financing techniques. This legislative proposal was adopted and enacted into law in 1990.
The Public Utility Holding Company Act of 1935 required Congress to direct the SEC to study the activities of investment companies and investment advisers. The study results were sent to Congress in a series of reports filed in 1938,1939, and 1940, causing the creation of the Investment Company Act of 1940 and the Investment Advisers Act of 1940. The legislation was supported by both the Commission and the industry.
Activities of companies engaged primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public, are subject to certain statutory prohibitions and to Commission regulation under this act. Also, public offerings of investment company securities must be registered under the Securities Act of 1933.
Investors must understand, however, that the Commission does not supervise the investment activities of these companies and that regulation by the Commission does not imply safety of investment.
In addition to the registration requirement for such companies, the law requires that they disclose their financial condition and investment policies to provide investors complete information about their activities. This act also:
- prohibits such companies from substantially changing the nature of their business or investment policies without stockholder approval;
- bars persons guilty of securities fraud from serving as officers and directors;
- prevents underwriters, investment bankers, or brokers from constituting more than a minority of the directors of such companies;
- requires that management contracts and any material changes be submitted to securityholders for their approval;
- prohibits transactions between such companies and their directors, officers, or affiliated companies or persons, except when approved by the SEC;
- forbids such companies to issue senior securities except under specified conditions and upon specified terms; and
- prohibits pyramiding of such companies and cross-ownership of their securities.
Other provisions of this act involve advisory fees, adviser’s fiduciary duties, sales and repurchases of securities issued by investment companies, exchange offers, and other activities of investment companies, including special provisions for periodic payment plans and face-amount certificate companies.
In addition to enforcing the requirements described above, the Commission may institute court action to remove management officials who have engaged in personal misconduct constituting a breach of fiduciary duty.
Investment companies also must file periodic reports and are subject to the Commission’s proxy and insider trading rules.
This law regulates the activities of investment advisers, including advisers to investment companies, private money managers, and most financial planners. With certain exceptions, it requires persons or firms that are compensated for providing advice about investing in securities to register with the SEC and conform to statutory requirements designed to protect their clients.
The most significant of the statutory provisions is the act’s broad prohibition against fraudulent conduct, which has been interpreted by the U.S. Supreme Court as prohibiting violation of the fiduciary duties of an investment adviser to its clients. Among other things, this provision requires an adviser to disclose to clients material facts concerning any conflict of interest the adviser may have with the client, to refrain from taking advantage of the position of trust the adviser occupies without the client’s informed consent, and to comply with specific prohibitions the SEC has adopted by rule designed to prevent fraudulent conduct.
The act requires investment advisers registered with the SEC to maintain books and records according to SEC rules. The agency conducts periodic examinations of investment advisers during which these books and records are reviewed to determine whether the adviser is in compliance with the act as well as the other federal securities laws.
The SEC has the authority under the act to deny, suspend, or revoke investment adviser registration based on a violation by the adviser of the act or of other laws prohibiting fraud, theft, or other kinds of financial misconduct. In addition, the SEC may impose various forms of sanctions on an investment adviser, including substantial fines, and it may issue a cease and desist order or seek an injunction in federal court prohibiting further violation of the law. The SEC may also recommend criminal prosecution by the U.S. Department of Justice for violation of the act.
Reorganization proceedings in the U.S. Courts under Chapter 11 of the Bankruptcy Code are begun by a debtor, voluntarily, or by its creditors. Federal bankruptcy law allows a debtor in reorganization to continue operating under the court’s protection while it attempts to rehabilitate its business and work out a plan to pay its debts. If a debtor corporation has publicly issued securities outstanding, the reorganization process may raise many issues that materially affect the rights of public investors.
Chapter 11 of the Bankruptcy Code authorizes the SEC to appear in any reorganization case and to present its views on any issue. Although Chapter 11 applies to all types of business reorganizations, the Commission generally limits its participation to proceedings involving significant public investor interest – protecting public investors holding the debtor’s securities and participating in legal and policy issues of concern to public investors. The SEC also addresses matters of traditional Commission expertise and interest relating to securities. Where appropriate, it comments on the adequacy of reorganization plan disclosure statements and participates where there is a Commission law enforcement interest.
Under Chapter 11, the debtor, official committees, and institutional creditors negotiate the terms of a reorganization plan. The court can confirm a reorganization plan if it is accepted by creditors for:
- at least two-thirds of the amounts of allowed claims;
- more than one-half of the number of allowed claims; and
- at least two-thirds of the amount of the allowed shareholder interest.
The principal safeguard for public investors is the requirement that a disclosure statement containing adequate information be transmitted by the debtor or plan proponent in connection with soliciting votes on the plan. In addition, reorganization plans involving publicly held debt usually provide for issuing new securities to creditors and shareholders which may be exempt from registration under Section 5 of the Securities Act of 1933.
The Commission carries out its work, in both Washington, D.C. headquarters and the field offices around the country, through divisions and offices charged with specific responsibilities under the securities laws. Additionally, there are offices responsible for the smooth and effective administration of the agency itself. Overall responsibility for carrying out the SEC’s mission rests with the Commissioners.
The Securities Exchange Act of 1934 formally created the SEC on June 6,1934. (The Securities Act of 1933 was administered by the Federal Trade Commission until creation of the SEC.) Among other provisions, this act set forth the composition of the Commission, which remains unchanged today.
A deliberative collegial body, the Commission meets numerous times monthly to debate and decide upon regulatory issues. Like other regulatory agencies, the Commission has two types of meetings. Under the Government in the Sunshine Act, meetings must be open to the public and to members of the press. However, if necessary to protect the Commission’s ability to conduct investigations and/or protect the rights of individuals and entities which may be the subject of Commission inquiries, meetings may be closed.
Commission meetings are generally held to deliberate on and resolve issues the staff brings before the Commissioners. Issues may be interpretations of federal securities laws, amendments to existing rules under the laws, new rules (often to reflect changed conditions in the marketplace), actions to enforce the laws or to discipline those subject to direct regulation, legislation to be proposed by the Commission, and matters concerning administration of the Commission itself. Matters not requiring joint deliberation may be resolved by procedures set forth in the Code of Federal Regulations.
Resolution of the issues brought before the Commission may take the form of new rules or amendments to existing ones, enforcement actions, or disciplinary actions. The most common activity is rulemaking. Rulemaking is generally the result of staff recommendations made to the Commissioners.
The staff is organized into divisions and offices with specific areas of responsibility for various segments of the federal securities laws. Divisions and offices serving under the Commission include Enforcement, Corporation Finance, Market Regulation, Investment Management, the Office of General Counsel, the Office of Compliance Inspections and Examinations, Office of Municipal Securities, and the Office of Investor Education and Assistance.
Other offices include those of Chief Accountant; International Affairs; Legislative Affairs; Economic Analysis; Administrative Law Judges; Secretary; Inspector General; Executive Director; Comptroller; Equal Employment Opportunity; Filings and Information Services; Administrative and Personnel Management; Information Technology; Public Affairs, Policy Evaluation and Research; Northeast Regional Office; Boston District Office; Philadelphia District Office; Southeast Regional Office; Atlanta District Office; Midwest Regional Office; Central Regional Office; Fort Worth District Office; Salt Lake District Office; Pacific Regional Office; and San Francisco District Office.
Division of Corporation Finance
Corporation Finance has the overall responsibility of ensuring that disclosure requirements are met by publicly held companies registered with the SEC. Its work includes reviewing registration statements for new securities, proxy material and annual reports the SEC requires from publicly held companies, documents concerning tender offers, and mergers and acquisitions in general.
This division renders administrative interpretations of the Securities Act, the Securities Exchange Act and regulations thereunder to registrants, prospective registrants, and others. It is also responsible for certain statutes and regulations pertaining to small businesses and for the Trust Indenture Act of 1939. Applications for qualification of trust indentures are examined for compliance with the applicable requirements of the law and the Commission’s rules. Corporation Finance works closely with the Office of the Chief Accountant in drafting rules and regulations which prescribe requirements for financial statements.
Division of Market Regulation
Market Regulation is responsible for oversight of activity in the secondary markets – registration and regulation of broker-dealers, oversight of the SROs (such as the nation’s stock exchanges), and oversight of other participants in the secondary markets (such as transfer agents and clearing organizations).
Financial responsibility of these entities, trading and sales practices, policies affecting operation of the securities markets, and surveillance fall under the purview of this division. In addition, it carries out activities aimed at achieving the goal of a national market system set forth in the Securities Act Amendments of 1975. Market Regulation develops and presents market structure issues to the Commissioners for their consideration. The division also oversees the Securities Investor Protection Corporation and the Municipal Securities Rulemaking Board.
Division of Investment Management
Investment Management has basic responsibility for administering the Investment Company Act of 1940, Investment Advisers Act of 1940, and the Public Utility Holding Company Act of 1935.
The division ensures compliance with regulations regarding the registration, sales practices, and advertising of mutual funds and of investment advisers. It also processes investment company registration statements, proxy statements, periodic reports, applications for exemptive relief, requests for interpretations and requests for no-action relief. Investment Management also drafts rules and regulations.
The division oversees the activities of the 15 active registered holding company systems, ensuring that their corporate structures and financings are permissible according to certain tests set up in the Holding Company Act. Investment Management analyzes legal, financial, accounting, engineering, and other issues arising under the act. It also participates in hearings to develop the factual records where necessary, files briefs and participates in oral arguments before the Commission, and makes recommendations regarding the Commission’s findings and decisions in cases which arise in administration of the law. All hearings are conducted in accordance with the Commission’s Rules of Practice.
Division of Enforcement
Enforcement is charged with enforcing federal securities laws, rules and regulations. The division’s responsibilities include investigating possible violations of federal securities laws and recommending appropriate remedies for consideration by the Commission. Possible violations may be discovered through the division’s own inquiries, through referrals from other divisions of the Commission, from outside sources such as the self-regulatory organizations, or by other means, including review of investor complaints and inquiries.
When potential securities violations warrant further investigation by the staff, the Commission is consulted before proceeding. The Commission may issue a formal order of investigation, which allows the staff to issue subpoenas and take other investigative action. At the conclusion of investigations, the Commission may authorize the staff to seek injunctions or other court ordered remedies, institute administrative proceedings against entities directly regulated by the Commission, or pursue other action as appropriate.
Office of the General Counsel
The General Counsel is the chief legal officer of the Commission. As such, the Office of General Counsel serves as the focal point for handling all appellate and other litigation brought by the Commission, either in connection with the securities laws or against the Commission or its staff.
Duties of this office include representing the Commission in judicial proceedings; handling multi-divisional legal matters; acting in disciplinary proceedings under the Rules of Practice; and providing independent advice and assistance to the Commission, its operating divisions, and offices. Advice concerns such matters as statutory interpretation, regulatory and legislative matters, public or private investigations, and congressional hearings and investigations. The General Counsel directs and supervises all contested civil litigation and SEC responsibilities under the Bankruptcy Code and all related litigation. It also represents the Commission in all cases in the appellate courts, filing briefs and presenting oral arguments on behalf of the Commission. In private litigation involving the statutes the Commission administers, this office represents the SEC as a friend of the court on legal issues of general importance.
The Commission also recommends revisions in the statutes which it administers. In addition, the SEC prepares comments on proposed legislation which might affect its work or when asked for its views by Congress. The Office of the General Counsel, together with the Office of Legislative Affairs and division affected by such legislation, prepares this legislative material.
Office of Compliance Inspections and Examinations
The Office of Compliance Inspections and Examinations (OCIE) examines SROs, broker-dealers, transfer agents, clearing firms, investment companies, and investment advisers to foster compliance with the securities laws, detect violative conduct, and keep the Commission informed of developments in the regulated community. OCIE determines policies and procedures with respect to the examination program. Both OCIE and the Commission’s regional offices conduct examinations.
Inspections and Examinations
The SEC conducts four types of inspections and examinations. These are: compliance examinations of investment companies and investment advisers; inspections of SROs; oversight examinations of broker-dealers; and special purpose, sweep, and cause examinations.
Compliance examinations of investment companies and investment advisers test and evaluate the firms’ compliance with the securities laws and applicable regulations.
Inspections of SROs test and evaluate how the American Stock Exchange, the Arizona Stock Exchange, the Boston Stock Exchange, the Chicago Board Options Exchange, the Chicago Stock Exchange, the Cincinnati Stock Exchange, the Municipal Securities Rulemaking Board, the National Association of Securities Dealers, Inc., the New York Stock Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange are performing their regulatory responsibilities.
Oversight examinations of broker-dealers test and evaluate the quality of the examination oversight being exercised by broker dealer SROs. During these examinations, the staff also looks for undiscovered violations or deficiencies.
Special purpose, sweep, and cause examinations provide a variety of techniques for addressing matters of particular interest or concern. In special purpose examinations, the staff conducts a series of limited examinations in a carefully focused area of regulatory interest. In sweep examinations, several teams conduct simultaneous examinations to provide regulatory oversight for particular geographic areas or segments of the industry. Finally, in cause examinations, the staff has reason to believe something is wrong, and focuses on the transactions or events giving rise to its concern.
Among the more important goals of the examination program is the quick and informal correction of compliance problems. When the staff finds deficiencies it provides the registrant with a letter (known as a deficiency letter), identifying the problems that the registrant needs to correct. The staff also lets the registrant know when they find no violations. Letters are generally sent to the registrant within 90 days of the end of the examination. Finally, when the staff discovers violations that appear too serious for informal correction, the matter is referred to the Division of Enforcement for further investigation and possible enforcement action.